I have been reading This Time is Different: Eight Centuries of Financial Folly for the last month. It has been slow going since it reads like a text book and I have read my fair share of text books in my life. I would have given up except that the authors have some collected some important historical data about financial crises. The authors have methodically compiled approximately 800 years historical data base on financial crises and their causes. There are lots of tables, charts, and professorial comments about the causes of the crises.

A few days ago I was surprised when Henry Blodget wrote an article advocating more government spending in the article, Well, It Sure Seems Like Keynes Was Right, and based it partly on Reinhart and Rogoff’s analysis of prior financial crises. I was surprised since the authors did not comment directly about stimulus spending in the chapters I read but here is what Henry wrote:

And I’ve also looked back at history–namely, Reinhart and Rogoff’s analysis of prior financial crises, the Great Depression, Japan, Germany after Weimar, and so forth.

So I skipped to the end of the book and read the last two chapters. The closest I came to a comment on Keynesian stimulus spending is:

Debt sustainability exercises must be based on plausible scenarios for economic performance, because the evidence offers little support for the view that countries simply “grow out” of their debts. This observation may limit the options for governments that have inherited high levels of debt. Simply put, they must factor in the possibility of “sudden stops” in capital flow, for these are a recurrent phenomenon for all but the very largest economies in the world.

and

Our extensive coverage of banking crises, however, says little about the much debated issue of the efficacy of stimulus packages as a way of shortening the duration of the crisis and cushioning the downside of the economy as a banking crisis unfolds.

So although the authors are concerned about plausible debt sustainability scenarios since it may lead to “sudden stops” in capital inflow in smaller economies, their data has shown that large economies like the United States have been immune from these “sudden stops”. This leaves open the question of what would happen to capital inflows if the United States undertook another stimulus like Henry Blodgett is recommending.   At what level of debt does the rest of the world decide that the United States debt is not sustainable and they should invest their capital elsewhere. If that scenario occurs we can safely say this time is different.

As a back-handed complement I would like to thank Henry for making the “This Time is Different” book much more interesting than it would be otherwise.